Reader Digest's ideas of using credit

In September 2005 issue, Reader's Digest suggested that we should not close credit accounts we no longer use.

"When lenders decide whether to extend credit, they look how much of your available credit you're already using - poetically called your utilisation ratio." It went on, "Let's say you have five credit cards, each with a $10,000 limit, and your total balance is $6,000. That gives you a utilisation ratio of 12% - not bad, in the eyes of lenders. But if you close four of your of those accounts, your ratio suddenly jumps to 60% - no good. 'You haven't borrowed an additional cent, but on paper it looks as if you're closer to being overextended,' says Craig Watts of Fair Isaac, the company that developed the credit rating system."

There are several issues here.

1. Technically, Reader's Digest is correct. By cutting down your credit cards and thus reducing your limit, your credit report will look worse. It is more difficult for you to get further credit.

2. The problem lies in the hidden messages. Just think,
a. Why do you need further personal credit, while you already have $50,000 credit card limit?
The article makes you accept this situation before putting forward their view. Unkwoningly we accept the situation that it is ok to have more personal credit lines.

b. $6,000 credit card balance, ouch! What on earth are you spending? The targeted readers of Reader's Digest is Asia middle class like you and me, thus, the example of $6,000 credit card balance is totally unacceptable as good financial practice.

You are either charging $6,000 for the month or having a $6,000 accumulated balance from previous months that you were unable to pay off. In either case, it is unacceptable.

The article basically makes you feel ok to have $6,000 credit card balance.

c. Under the credit rating system developed by Fair Isaac, a middle class with $6,000 credit card balance and $50,000 approved limit is more credit worthy than a middle class with $600 credit card balance who choose to have $2,000 credit card limit. This is the failure of its credit rating system, or the entire banking credit rating system. It is bizzare that we have to adjust for that.

d. Such credit rating system rates a person who don't require loan with lower credit worthiness than a person who needs loans and manages to get huge credit lines. It actually promotes a culture of borrowings.

I was very fond of Reader's Digest. It was many years ago when the world was still divided between West and East, democracy and communism, black and white, free world and iron curtain, good and evil, etc. Such black and white world ended in 1989.

Today, it allows advertorial like "Managing Your Money", that promotes financial products, openly giving so called "financial advices" in their advertisement.

Why three credit cards?

The three credit cards system is a powerful personal credit cards administration system.

1. Charge your fixed payments (i.e. handphone, insurance, utilities, subscriptions, Astro, etc.) to your 1st credit card.
2. Charge your ad hoc payments like shopping, eating out at restaurants, groceries, petrol, etc. to your 2nd credit card.
3. The 3rd card is for emergency.

The rule is, you only bring your 2nd and 3rd cards out. You always keep your first card in your drawer.

Why bother to use three credit cards?

Because,

1. Once your segregated the two types of expenses, i.e. fixed payment and daily ad hoc expenses, into separate credit cards, it is much easier to monitor your expenses.

You have separated your expenses into fixed expenses and discretionary expenses. You can just cut away your 2nd credit card and stop all your discretionary expenses at crunch time.

2. Credit cards companies are helping you to do a very neat accounting records of your fixed payments and day to day expenses. So that in a glance, you know how much is your monthly fixed commitments. It helps to control you from adding such monthly financial commitments.

3. The 3rd card provides a contingency credit needs, i.e. hospitalize, before you can get anything from your insurance company. It also serves as a back up card when a merchant could not process your 2nd card.

Three good reasons.



12 amazing action plans avoiding credit card debts mess...
Part 1: Preventing credit card mess (1)
Part 2: Preventing credit card mess (2)
Part 3: Preventing credit card mess (3)

A refined article of twelve action plans in preventing credit card mess published in EzineArticle.

Preventing Credit Card Mess

Our refined article on preventing credit card mess published in EzineArticles.


As Featured On Ezine Articles

Credit card debts problem is extremely common today. It is usually the first sign of longer term financial troubles. How to manage your credit cards so that you will never fall into credit card mess? There are four pillars in preventing credit card debts problem.

First pillar: Proper credit cards administration

One of the best practices in managing your credit cards is to segregate your credit card expenses into three credit cards based on your spending pattern. The first credit card should be used for such fixed payments like utilities, subscriptions, insurance, memberships, etc. The second credit card should be kept for day to day expenses like shopping, eating out at restaurants, groceries, petrol, etc. The third credit card is for emergency cases.

Every month you need to clear the entire balances of three credit cards. You should not just pay any amount above the minimum requirement. The moment you leave a small balance, it adds up to the next month’s balance. Remember that this is a preventive action plan.

Put the second credit card away if in any month you are unable to clear the entire balances of three credit cards. Stop using the second card until you manage to pay off the entire balances of your cards in one month. You will have to pay cash for purchase made during the month. Don’t use your third credit card, it is for emergency cases only.

If you are still unable to clear the entire balances of your credit cards every month even after you have put your second card away, you should then review your monthly fixed payments that are charged to your first credit card. Some expenses may not be crucial for quality living.

Second pillar: Budget, the magic number

You just need to know how much you can charge to your second credit card in a month. You really don’t have to take out your spreadsheets or accounting software unless you enjoy using them. The calculation should be simple and straightforward. The magic number is your take home net salary less your monthly fixed expenses, i.e. repayment of home loan, insurance, memberships, school fees, etc. This magic number does not show how much you can spend but it indicates your monthly spending limit. It is a mark to ensure that you are able to pay off your entire three credit cards balances in one month. Keep the magic number in mind every time you charge an expense to your second credit card.

You must have a repayment plan in mind for big items like renovations, furniture, overseas vacations, etc., before charging the expenses to your second credit card. Do you have fixed deposits elsewhere to pay off the credit card debts? Are you prepared to sell your shares to clear the balances? Have you arranged other borrowings to pay off the credit cards debts? If you don’t have the financial resources or other financing means, do not spend on such big items. It is the start of your financial troubles. You must remember that credit card debt is the most expensive consumer debt that you can get yourself into.

Third pillar: A different mindset

Live now.

"Live today" is not equal to "spend today". Mass media propagates the virtue of spending by equating it with "live now". "Carpe diem and you buy" is the message that drives a generation of debt-ridden middle class. The core of the action is to improve your spending effectiveness in bringing satisfaction. If you need to spend a lot in order to elevate your happiness or satisfaction to the level of an average person, you are highly ineffective. Find good things in life that require little spending. Live now, not spend now.

Practise procrastination in buying things. After a while when you cool down it probably doesn’t seem to matter whether you own it or not.

Fourth pillar: Quality lifestyles

Focus on quality of living and not on spending. Check your credit card statements and identify your killer spending habits. Find quality alternatives. The best coffee I had was not from coffee bars like Starbucks, Strudels, etc. but from a small air-conditioned Indian restaurant. The coffee is called Bru Coffee. If a trip to Tokyo is too expensive, why not consider Sydney or Hong Kong? Spend time reading with your children instead of partying all night.

If there are material things in life that you couldn't do without, even if it means being unable to pay off your cards this month or for the next few months, you will get into credit card problems sooner or later.

Income level has got nothing to do with debts problem. There are too many bankrupt high earners around for us to know this. It is about how you treat your money, as simple as this.

Practice the four pillars and let credit card problems be a thing of the past.


12 amazing action plans avoiding credit card debts mess...
Part 1: Preventing credit card mess (1)
Part 2: Preventing credit card mess (2)
Part 3: Preventing credit card mess (3)

Suze Orman on credit card mess

More resource on dealing with credit card mess. Check this out, "How to take control of your credit cards?" by Suze Orman at Yahoo Finance. Beside the guides explore the right hand side bar.

Paying your share purchases with credit card!

Hong Leong Bank & HLG Securities offer Mastercard credit card that allow their clients to settle share purchase via credit card. At first glance, it seems to be a revolutionary concept. Using credit card to pay for share purchase actually extends your settlement days from T+3 to as long as T+50 days!

On a closer look, the handling fee is 1.5% of the settlement value. So beside paying 0.6% normal brokerage charge, you will suffer another 1.5% for a financing period stretched from 20 to 50 days. (If the T+3 settlement day falls right after your credit card statement day, you will have 50 days before the due date of credit card payment. If the T+3 settlement day falls right before your credit card statement day, you will have 20 days before the payment dues.)

So, 1.5% for 20 days to 50 days. A quick calculation shows that the financing cost ranges between 11.0% (1.5%/50 x 365) to 27.4% (1.5%/20 x 365)! It is extremely expensive even compare to share margin financing which usually ranged between 5% to 12%.

If you have already used share margin financing or personal loan to pay for your trading activities, stick to it. This credit card deal is really not a good deal...

More about share margin financing...actually our view is that DON'T borrow money to invest.

Preventing credit card mess (3)

...continued

Two actions for a quality lifestyles

Action plan 11
Focus on quality and not on spending. Check your statement and identify your killer spending habits.
The best coffee that I had was not from coffee bars like Starbucks, Coffee Bean, Strudels, etc. but from a small air-conditioned Indian restaurant in Leboh Ampang. The coffee is Bru Coffee and it cost me RM1.

Action plan 12
Look for alternatives.

For example, if a trip to London is too expensive, how about Melbourne or Shanghai? Buy used car instead of brand new? Share CDs, books, VCDs with your friends? Remember, whatever you do, wherever you go, when you live the moment you will realize that the means to the moment sometimes is insignificant. List down your killer spending habits (check your statement now) and brainstorm 3 solid alternatives for each habits.

Choose places where you are comfortable with their prices.
Whether you eat out or have fun in karaoke with a crowd of family or friend, choose a place that you are comfortable with the maximum prices in the menu ("All on me"”, you may happily say knowing it is affordable.) and not a place where you have to worry if they order the items above the average price of the menu.

More...
Income level has got nothing to do with debts problem. There are simply too many bankrupt higher earners around for us to know this. It is about how you treat your money and life, as simple as this.

Practice the above 12 action plans and let credit card problems be a thing of the past.

If there are material things in life that you couldn't do without, even if it means being NOT ABLE to pay off your cards this month or for the next few months, forget about all the above preventive action plans. Because, sooner or later, you WILL get into credit card debts trouble.

If this is the route you choose and you believe you can always get out of it, go ahead. No judgement here. (Honest! We all have the right to choose the way we want to live.)


12 amazing action plans avoiding credit card debts mess...
Part 1: Preventing credit card mess (1)
Part 2: Preventing credit card mess (2)
Part 3: Preventing credit card mess (3)

A refined article of twelve action plans in preventing credit card mess published in EzineArticle.

Preventing credit card mess (2)

...continued

Three actions from getting your magic number, budget

Action plan 6
Find out your limit and set a maximum limit.
How? Spend less than the total of
a. One month income, less
b. Your fixed monthly payment add 20% buffer
If you spend any amount more than this magic number, you are either eating into your savings or increasing your debts.

You don't have to do a detail listing of expenses unless you enjoy doing it. It should be simple and quick. Just do a quick calculation with pencil and calculator now. Once you get the magic number out, you know you should never spend anything more than this amount at any one month.

Action plan 7
For big ticket item, find and decide a repayment method before spending.
Find the resource to pay back when you use your 2nd card for big ticket expenses like overseas trips, new kitchen cabinets, sofa, etc. Do you have fixed deposit elsewhere to payback the credit card balances? Are you willing to sell off your shares in stock market to clear the balances? Remember, credit card provides convenience of payment only.

Action plan 8
Still keen to spend without financial resources? Draft a repayment plan and stick to it.
If you still insist to buy even if you do not have existing financial resource, i.e. shares, unit trusts, fixed deposits, etc. to pay back, then develop a repayment plan. For example, cut down your future night outing, change your lunch place from restaurant to hawker centre, identify a bank that offer 0% balance transfer for 6 month, refinance your house equity, etc. Most importantly, you must know you can stick to the plan. Swear to yourself.

Two actions for a different mind set

Action plan 9
Live now.

"Live today" is not equal to "spend today". Mass media propagates the virtue of spending by equating it with "live now". "Carpe diem and you buy" is the message that drives a generation of debt-ridden middle class. If you need a brand new BMW 5 series to make yourself feel good even it means breaking your financial limit, you are highly ineffective, for you need such a big spending for such a small gain of satisfaction. Yes this is the word, consumption ineffectiveness. You need to consume more in order to bring your happiness level equal to an average person. It is not how rich you are that you can avoid debts problem, it is about YOUR effectiveness of spending in bringing satisfaction. When you have more money you get numb from the original level of spending. You need to spend more just to get to the earlier level of joy. The action plan is to change your mind set and find happiness that costs little and elevate your consumption effectiveness.

Action plan 10
Procrastination is a virtue, for once.
Practise procrastination in buying things. Tell yourself you are going to buy it but not now. After cooling down, it probably doesn’t seem to matter whether you own it or not.

More action plans on prevetion of cerdit card debts in Part 3...

12 amazing action plans avoiding credit card debts mess...
Part 1: Preventing credit card mess (1)
Part 2: Preventing credit card mess (2)
Part 3: Preventing credit card mess (3)

A refined article of twelve action plans in preventing credit card mess published in EzineArticle.

Preventing credit card mess (1)

Credit card mess is usually the first sign of longer term financial troubles. These are 12 amazing action plans to manage your credit cards that you will never fall into credit card mess again. We tackle the issue from four fronts:
1. Proper credit cards administration
2. Budget (no spreadsheet, no accounting, just 5 minutes with pencil and paper)
3. A different mind set
4. Quality lifestyles

Five actions from proper cards administration

Action plan 1
Keep three cards.
The 1st card for fixed payments (i.e. handphone, insurance, utilities, subscriptions, Astro, etc.), the 2nd card for ad hoc payments like shopping, eating out at restaurants, groceries, petrol, etc. The 3rd card is for emergency. (Why such three credit cards system?)

Action plan 2
Clear the entire balances of the three cards every month.
Yes, the ENTIRE balances of ALL THREE CARDS. Not just any amount above minimum balance. The moment you leave a small balance, it adds up to the next month's balance. This is a preventive action plan, remember?

Action plan 3
Otherwise put the 2nd card away.
The moment you cannot pay off the entire balances, put the 2nd card (the card for shopping, eat out, etc.) away for one month until you manage to payoff the entire balances of the 1st, 2nd and 3rd card in one month. You will have to pay cash on day to day spending now. (More about the 3rd card here. You are not supposed to use it, remember? It is only for emergency.)

Action plan 4
Give standing order instruction to your bank to pay the FULL AMOUNT of your cards from you salary bank account every month. This will not only ensure your credit card debts are cleared every month, it also ensure you will control your expenses at the point of charging the expenses to your credit cards.

Action plan 5
Review, reduce and/or cancel fixed payments that you charged to the 1st card.
If you still cannot clear the entire balances of your cards every month even after you have put your 2nd and 3rd card away, you should then review your monthly fixed payments that are charged to your 1st card. Do you really need Astro? Can you cut down petrol or hand phone expenses? Go through your 1st card statement and decide.

Still have problem to clear the entire outstanding balances monthly? Ok, now, it is not about prevention, it is about salvation from credit card debts. We will add another article on this soon. More action plans on prevetion of cerdit card debts in Part 2...

12 amazing action plans avoiding credit card debts mess...
Part 1: Preventing credit card mess (1)
Part 2: Preventing credit card mess (2)
Part 3: Preventing credit card mess (3)

A refined article of twelve action plans in preventing credit card mess published in EzineArticle.